These capital requirements were notable because, for the first time, regulatory minimum capital requirements could be based on the output of banks’ internal risk measurement models. The market risk capital requirements thus stood in sharp contrast to previous regulatory capital regimes, which were based on broad, uniform regulatory measures of risk exposure. Both supervisors and the banking industry supported the internal-models-based (IM) market risk capital requirement because firm-specific risk estimates seemed likely to lead to capital charges that would more accurately reflect banks’ true risk exposures. That market risk was the first—and so far, only— application of an IM regulatory capital regime is not surprising, given the relatively advanced state of market risk.
